DEFI: DECENTRALIZED FINANCE
Plain English
DeFi lets you earn interest, borrow, lend, and trade without a bank — using smart contracts. Instead of trusting Chase or Fidelity, you trust code. The yields can be higher, but so can the risks: hacks, liquidations, and rug pulls are real.
Going deeper
Decentralized Finance (DeFi) refers to financial services built on smart contracts, primarily on Ethereum but also on other chains. Core DeFi primitives include: DEXes (Uniswap, Curve) for trading; Lending protocols (Aave, Compound) where you earn interest by supplying assets or borrow against collateral; Yield aggregators (Yearn Finance) that optimize yields across protocols; Liquidity pools where you provide two assets and earn trading fees. Key concepts: APY (Annual Percentage Yield), TVL (Total Value Locked — total assets in a protocol), liquidation (when your collateral falls below a threshold), impermanent loss (the risk of providing liquidity), and smart contract risk (bugs in code can drain funds).
Examples
Lending Example
You supply 10 ETH ($30,000) to Aave. You earn 3% APY in AAVE tokens. You also borrow 10,000 USDC against it (33% LTV). You invest that USDC in another protocol earning 8%. Net: earning on both the collateral and the borrowed amount — but liquidation risk if ETH drops.
Impermanent Loss
You provide $5,000 ETH + $5,000 USDC to a Uniswap pool. ETH doubles in price. Due to the AMM formula, you end up with less ETH than if you'd just held. The pool rebalances automatically — you miss some of the upside. This 'loss' vs holding is impermanent loss.